Value-Based Contracts: The Real Risk to Hospitals and Specialists

Episode Overview

Transcript:

Daniel J. Marino: Welcome to another episode of Value-Based Care Insights. I'm your host Daniel Marino. In today's episode, we're going to spend some time talking about the contracting activities between hospitals, physicians, and payers. I've been doing managed care contracting for about 15 years and I can't remember a time that is more challenging with contract negotiations than right now. There has been a lot of pressure obviously placed on hospitals and physicians, as well as the payers. And I think some of this is really as a result of COVID. COVID has pushed a lot of economic pressures on the hospitals. Costs are going up. We're dealing with a challenging economic era right now where we're experiencing wage inflation and supply costs going up. In some cases, it's added anywhere between five to 10% additional costs on hospitals and health systems - and you can't just pass that on to the consumer.  Our reimbursement is fixed. So what we're seeing is hospitals and physicians and so forth are going to the payers and they're saying, "we need help, we need some additional reimbursement in order to maintain our margins" - let alone being able to grow additional revenue or additional margins. And yet the payers are pushing back. And again, as a result of COVID, if you recall what happened, we shifted a lot of the care that was done in the hospital to the outpatient arena. And we had to because of course we needed to take care of the patients and address their needs. What that allowed the payers to do was to be able to say, "why do you need to do this in the hospital when you can be doing this in the outpatient arena? - and by the way, it's cheaper, and we're going to cut some of your level of reimbursement." So when you think about some of the dynamics that are driving these challenges in contract negotiation, I think it's coming down to a couple of things. I think, one, the economic pressures that we're in right now. I think, two, the shifts in site-of-care that we've experienced and are continuing to experience is changing the reimbursement structure. And then I think the third area that I'm seeing a lot is payers continuing to want the providers, hospitals, physicians, and so forth, to assume a lot more of the risks, the medical risks of the patients. The payers don't want to assume that. So when you take all of those things into consideration, not to mention the shifts in technology, and so on and so forth, it's really providing for a very challenging negotiating period between hospitals, between physicians and their payers. To help walk us through this is my colleague, Cliff Frank. Cliff's got a tremendous amount of experience in managed care contracting and has been doing this for many, many years, and I'm sure has one or two opinions on this subject. Cliff, welcome to the program.

Cliff Frank: Thank you Dan. Glad to be here.

Daniel J. Marino: So Cliff, we're thinking about hospitals right now. And the economic pressures that they're in and ways of being able to negotiate a fair and equitable managed care contract, a fair and equitable reimbursement stream to at least be able to maintain certain margins. What are you seeing in some of these challenges? What are some of the top of mind things that are really creating some challenging areas in contract negotiation?

Cliff Frank: The first is that payers are desperate to move cases away from hospitals to lower costs in the community or freestanding alternatives. You saw this with COVID around the hospital-at-home, and suddenly, it's covered by Medicare, it's covered by Medicare Advantage, and private payers. And if a hospital does a hospital-at-home, all they are moving is the patient from the left pocket to the right pocket, and yet they still have the fixed costs associated with the right pocket.

Daniel J. Marino: The payers are actually putting a lot of pressure to shift that reimbursement, right? 

Cliff Frank: The reimbursement pressures are tremendous. And it's not just focused at individual hospitals. Payers are also using the medical necessity provisions of their medical policy determinations to push services away from hospitals, such as hospital based outpatient infusion, hospital based radiology/CT/MRI, even hospital-based outpatient surgery for easy surgeries. All the payers are pushing hard on all those services to either prohibit them or deny them except by some sort of clinical reason that substantiates why the patient is at risk and needs to be in hospital, and also using benefit designs to drive patients away from hospitals wherever they can. This is getting much worse and much more predominant. The other thing that payers are doing is just deny, deny, deny. So it's not just that they've done these policies, but just because it's Tuesday, they'll deny a bunch of claims and make the providers jump through a bunch of hoops to get their money. So the friction costs have, in some cases, doubled, particularly in Medicare Advantage. And in some of the Medicaid managed care plans. It's ridiculous. 

Daniel J. Marino: It seems like with many of the payers, they have an open-ended free will to change some of the policies and medical services. As I was talking with one of my clients, she was doing an analysis on the reimbursement for certain surgical services and couldn't figure out why their overall net collection rate on certain procedures was low for a couple of payers this year compared to last year. So when she dug into it a little bit, what she noticed was there were a lot of denials for things this year for things that normally got paid. And when we drill down into it, what we noticed was the payers changed a lot of their policies, posted it on their portals, never really advised the providers and just denied it with a response code that says you need to go back and check the administrative policy - that it's nonpayable.

Cliff Frank: The plans have gotten very aggressive about that. I have a colleague who recorded 2,200 medical policy changes by UnitedHealthcare in one year. My goodness 2,200. It's amazing.

Daniel J. Marino: So I want to get back to that shift in site-of-care, because I really think that's a big one. When we were in COVID, I gave a lot of credit to the physicians and certainly the hospitals. They had to move very quickly to obviously manage the COVID patients in their acute facilities, while still trying to take care of the needs of other patients. And of course, they did this outpatient there, they did this remotely, and they did what they needed to do to take care of the patients. And clearly it was the right thing to do for the patients in the industry. But it really created some challenges on the reimbursement side. What are you seeing in terms of how hospitals can counter that? Are you seeing some site of service differentials? Are they able to maybe pop up a little bit more? You're never gonna get the same rate as you're gonna get on the acute side. But there has to be a way that we can at least recover some of that revenue opportunity. What are you seeing?

Cliff Frank: I'm seeing a lot of hospital margins collapse, because frankly, the imaging service line is very profitable for hospitals, so is outpatient surgery, so is home and hospital infusions, and they're all under direct assault. So that what they are gonna have is lower margin or no margin inpatient business, that's critical care, and not much else, because the plans are really trying to strip it away. It's almost like last year or the year before was as good as it gets. Because the other people who are currently starting to pay in this arena are the employers. They're mad as hell, because they're the ones who have to pay these outrageous bills in their mind at a $2,500 ER visit to get a boo boo taken care of. It just makes them crazy. So you see employers embracing reference based pricing, where basically they send the hospital a check at 130% of Medicare and say, sue me, if you don't like it. There are all kinds of combative strategies that are being played out now that even five years ago, you would never have thought. Who would have thought that medical policy is a weapon?

Daniel J. Marino: Right, it clearly is now, no doubt about that, 

Cliff Frank: Well, and to their defense, that the employers and to some extent, the payers, are locked into year long contracts, or more, when they issue rates to an employer. They issue the rates in July. And it's not till the following January 18 months later that they can change the premiums. So they're playing catch up. In some cases, the plans are pretty fat and happy. In other cases, plans are not, but they're looking at 12% trends. And their customer, these employers are going to have a really hard time keeping up with it. And feeding in additional rate increases to the hospitals is not in the equation.

Daniel J. Marino: When you think about that, a lot of the payers are saying, hospital, if you want an increase, then we're going to tie you to some level of performance, we're going to add a risk component to that. And what I've been seeing is some of the payers are out there, and they're sort of wagging some pretty good carrots based on performance. But it comes with some downside risks. And if you don't perform, you're gonna have to pay the plans back. And I think it really scares the hospital CFOs to death, because a lot of them feel like they're not ready for risk. You need to be able to increase your level of reimbursement. So I guess the question here is really twofold. Are you seeing these hospitals moving forward into risk? And then if the answer based on that is yes or no, then how do the hospitals start to position themselves for success either assuming a level of risk, or negotiating different types of contracts that position them for risk a year or two down the road?

Cliff Frank: So two points. The first is that if the hospital is going to take risks on its own, and the doctors are still, in today's world more is better. It's pretty easy for the hospital to end up upside down. And so you really need that the clinically integrated network has to kind of step up. And most hospitals have a CIN now. And if they don't, they need to build one. But having that clinical financial alignment among all the parties really opens up a lot of opportunities,

Daniel J. Marino: So you really need to focus on utilization management, right? And it needs to be efficient utilization management. And I think making sure that your utilization is not too high, because we're used to that in a fee for service world, but it needs to be kind of more appropriate towards the care that's being delivered.

Cliff Frank: Well, that's exactly right. But to really bring that about, particularly inside the hospital employed physician population, the comp model for that medical board needs to be something other than straight REUs, because that's just a churn and burn model. So there's got to be some qualitative or other kind of non utilization driven metrics to drive physician comp. That said, there's one other piece that for hospital partners and physicians to a similar extent, is that your high friction payers, the ones like that are your your Medicaid managed cares that only know how to deny any ER visit That's level one, two, or three or every third inpatient admission, just because it's Tuesday, those friction costs are a big percent of revenue associated with the Medicaid or Medicare Advantage revenue base for facilities and providers. I mean, it can be 20 or 30 points. If you step into a risk deal, you know right away one of the conditions is, well, then you pay or get out of my hospital, because I don't really care about your utilization management decisions anymore, because I'm paying for it. So get out. And in so doing, you reduce a whole lot of these friction costs, which gives you kind of a margin for error. And then of course, you can lay off the big claim, the one or two big claims that can blow you up onto some sort of reinsurance arrangement. These populations don't spike so much unless there's a big change in enrollment. And you can protect yourself from that as well, and how you negotiate the contract. But the idea is, start with your payers who are giving you the most trouble, because at least you pick up the good game by eliminating high friction costs.

Daniel J. Marino: So when you think about the friction costs, I mean, obviously it's twofold, right? It also impacts your reimbursement, but also impacts your internal costs of reprocessing.

Cliff Frank: Absolutely

Daniel J. Marino: How successful our hospitals are managed care groups and negotiating some of that out of the contract. So I think it's about some of these administrative costs, like the pre certification, pre authorizations that have to occur. It's a pain doing some of those things, especially on some of those services where you know it's going to get approved, the patient clearly needs it. It's just hoops that we have to go through that I think delays a service for the patient and certainly delays the reimbursement. In your experience, how successful have hospitals been in trying to negotiate that out of the contract?

Cliff Frank: It can be very successful. The problem is, you don't want to be too successful. Because now if you have some people, because you took away the constraints, and now they go crazy with CTs or anything else, suddenly they're picking your pocket, not the plan. So it has to be a kind of collaboration where if providers have a good track record of not getting a lot of denials for these kinds of cert, well, then gold card them, call them good, Let them go. But if you've got some cowboys mixed in, those processes now are working for you. Because they're protecting the fund that is built by the capitation payment. So not all utilization reviews are bad. But what has happened is it has become so over the top to where people are having to pre-search generic drugs for crying out loud. It just doesn't make any sense at all.

Daniel J. Marino: No, it doesn't. I would recommend managed care folks, certainly CFOs, start to look at those types of services, which are pretty much turnkey, low risk, not impacting the volume, and certainly not going to take away or promote sort of the cowboy-ism, that maybe we would call it an over utilization. And if you could identify some of those services, help negotiate the quicker approval processes within that to cut down on those administrative costs, I think that would go a long way. And frankly, I would think some of the payers would be willing to do that, because they're doing it anyway to cut down on some of their internal costs.

Cliff Frank: Yes, it's in their interest too and as a first mover in a market, you can get some things that as a second or third mover you might not. So, gold carding, waiver of prior off, or met post admission medical review, the day to day utilization review that results in early discharges, all that stuff can be internalized into the providers and take it away from the plans. So, it doesn't mean that you don't do it, it just means you do it with a heart and some common sense, instead of a playbook. That's really designed to just add headaches.

Daniel J. Marino: I agree. As we're talking here, Cliff, a question that comes to mind that I get asked by CFOs a lot is that we know we need to get into risk, we're not really quite sure where to start, and does it make sense to to start with some type of a risk based contract around a smaller group or a smaller proportion of our integrated network. And my response has always been, if you're able to identify your high performing providers, and obviously, the definition to what makes up a high performing provider is something that you have to work through, it may make sense entering into a risk based contract just for that small group of providers, where you can sort of learn, develop your expertise, measure your success, and then to begin to expand it. Are you seeing that as a philosophy, or at least as an approach for folks getting into these risk based contracts?

Cliff Frank: I'm not sure I agree. I think it's very situation specific. Because sometimes you're gonna have high performers and low performers in tax ID. And now how do you kind of fix that? Even inside the same specialty group.

Daniel J. Marino: That's a good point.

Cliff Frank: So picking and choosing is sometimes difficult. If it's an individual plan, like an ACA plan, or Medicare Advantage plan, where the member has chosen a narrow network, that can work. If it's a broad network plan, and now you're trying to do some kind of a hidden subnetwork that can, on the hospital side, blow up ugly, because your big emitters suddenly are getting cut out of a block of business, and they're gonna take major offense. And so a lot of hospital administrators have lost their jobs over things like that.

Daniel J. Marino: So maybe you don't parse out the network. But you parse out the types of contractual arrangement. So, if you've got a larger plan, and within the plan, you can create a narrow network structure almost like a two tiered component of the plan, where that narrow network allows you to assume some risks that tie into the benefit plan of the employer group, well, then all of a sudden, you've got something, because then you're restricting some of the variability in the plan. That would probably make sense.

Cliff Frank: There are lots of ways to work around it from member incentives, to use certain five star doctors, or to be very clear with physicians what it takes to be a five star doctor and giving them feedback as to where they are. All they want to know is what are the rules? And how am I scored? And then they can choose to work their way up the scoring system or not. What they don't want is a rigged game. That just works against them. They want a fair shot.

Daniel J. Marino: I agree. And I think another area that is really a requirement of the successful risk based contract, and you've elaborated on this, is how you're structuring your integrated provider network. Obviously, moving to a fully clinically integrated model is where you want to go. But you have to have the data to measure performance, you have to have the data to measure utilization, but you also have to have the right incentives that allows physicians to change or evolve their care model, or align their clinical care models with the financial performance, but in a way that makes sense for the patient. I think really being able to understand what's occurring with your integrated provider network and continuing to evolve that, that's a strong prerequisite. Without that, I think you're going into these contracts blind.

Cliff Frank: Well, and that's the argument for scale. Because you're not going to do any of that on three patients a month. It's just noise. So you have to have a certain level of scale. And frankly, that's why I think these ACO reach models could be pretty interesting because those primary care doctors are going to have way more incentives to drive critical clinical decision making to their specialists, and to the facilities that they use.

Daniel J. Marino: Let me ask you a question then. Scale I think is important. When you think of scale, it's obviously geographic reach the number of providers but it's also attributed to lives. What's the attribution or the attributed lives that makes sense in a risk based contract? Where do you start with: 15,000, 10,000, 5,000?

Cliff Frank: It depends who the you is. At the individual primary care physician level 400 or 500 patients would be plenty. At the specialty, at the GI or general surgery, if it's going to be 15-20 patients a month, that starts to resonate. At a hospital, if it's going to be the same 15-20 patients a month, they can begin to pay some attention to it, but they're not going to turn themselves inside out like a pretzel. It's more like, how can we give these patients a little bit more love and attention, or it's somebody's job, specifically to do that, not the whole system. I'm struck by a similarity now, to where we were around 1980. There DRGs had just hit, and an average length of stay was about six, and we're getting paid per diems, or percent of charge for Blue Cross and the other plans. And there were some hospitals that said we're at peak length of stay. So we're going to turn ourselves upside down, flip our contracts to DRG, just like Medicare, and then we're going to crush utilization and move to a shorter length of stay, and they did it. And they made a lot of money. Then the savings, 500 bucks a day or whatever it was, went right to the bottom line. So we're kind of in that situation now, in that if you assume that revenues overall are going to continue to go up, because we're a big bad hospital system and work just gotta tell the payers how to do things. Well, that may work, it may not. But it's a risk. Because if your high margin services, like imaging and therapies and infusions all go away, then all you got last left is the stuff you don't make any money on. So maybe it's time to kind of look at that same model again, and say, we need to kind of lock in these underlying unit reimbursement rates, because what's gonna happen is there will be less volume in these other services, but we're still going to get paid full.

Daniel J. Marino: So you're locking in the reimbursement and then you're focusing on changing the mindset of how we're managing utilization, how we're managing the performance, similar to what we did years back under the old DRG structure.

Cliff Frank: It also kind of flips the payers proclivity to push everything away from the hospital, in such a way that the hospital still makes the same net revenues they were making before with lower costs. It's that same playbook.

Daniel J. Marino: This has been fantastic, a great discussion. And I think anytime you talk about risk in a contract, anytime you talk about changing the reimbursement structure, this catches the attention of all of our hospitals, all of our physicians, and even the payers because it's a tough one. It's a tough environment that we're living in now. And I think it's only going to get tougher. Thank you for your time. This has been wonderful. 

Cliff Frank: It's been great. Appreciate it. 

Daniel J. Marino: In summary, as Cliff mentioned, I think there's a couple of real things to take into consideration. As we're considering moving into a risk based contract, I think the big piece of this is really understanding where to start. We talked about a narrow network contract, we talked about the reimbursement structure in Cliff’s example in terms of a different type of reimbursement where you're locking in what that rate would be maybe in a cap payment, and giving you a chance to manage utilization, I think that is an important one. What we have to take into consideration is things around shifts inside of service, which for good, bad or indifferent, we've shown that we can do it differently as an industry, things don't have to happen in the acute setting, could happen in the ambulatory. How do we then structure our reimbursement to protect that revenue and protect our margins? I think the other thing to take into consideration is our cost. If we're going to enter into risk based contracts, we have to reduce our cost structure internally, and then also reduce, as Cliff mentioned, the friction costs with the payers. Equally important. That's the only way that these contracts are really going to make sense. In closing, I want to thank you all for listening. Appreciate it. And as always, if there's any comments or feedback, please don't hesitate to drop us a note. For more information, please see Luminahp.com/insights. Until next time, I'm your host, Daniel Marino. Have a great day.

About Value-Based Care Insights Podcast

Value-Based Care Insights is a podcast that explores how to optimize the performance of programs to meet the demands of an increasingly value-based care payment environment. Hosted by Daniel J. Marino, the VBCI podcast highlights recognized experts in the field and within Lumina Health Partners.